60/40 portfolio split explained: the basics

If you’ve ever read about a 60/40 portfolio split and weren’t sure what it means, you’ve come to the right place. This basics explainer will help you understand what it is, who uses it, the upsides - and potential downsides - to it and whether it’s still a viable investing rule of thumb in today’s world.

What do we mean by a 60/40 portfolio split?

A 60/40 portfolio split means you invest 60% of your money in shares and 40% in bonds. Shares are at the riskier end of the risk/reward spectrum as you’re just buying into a single company. As a result, they have the potential for higher returns (or losses). While bonds are at the lower end and generally carry less risk. Bonds are loans to government or corporations that pay fixed interest over a set period of time.

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Who uses the 60/40 split?

It’s used by fund managers looking to build a balanced fund and investors looking for moderate returns without taking on too much risk. In recent years, some balanced funds have shifted closer to a 70/30 split - putting more into shares - to boost growth potential and limit the impact inflation can have on money invested over time.

How it works - striking the right balance

You’ll need to keep on eye on your portfolio if you want it to keep its 60/40 mix. Market moves will shift those percentages with time. If the value of your shares grows, it’ll take you above your desired 60% allocation. So, you’ll need to sell some shares and buy more bonds to restore the balance. If bonds outperform, you’ll need to sell some bonds and buy shares. It’s worth checking in on your portfolio - and rebalancing it if needed - every three to six months or so to stay on track.

Advantages of the 60/40 approach

First and foremost, it provides diversification. Shares drive growth when markets are strong, while bonds help cushion losses when markets fall. Second, it’s easy to understand and implement, with just two main asset types to manage. Finally, it tends to smooth out your returns over time, so you’re less likely to see as severe swings in your portfolio’s value.

Downsides of the 60/40 approach

Because you never hold more than 60% in shares, you could miss out on potential growth when markets rise. Likewise, bonds may underperform when interest rates rise, which can drag on your bonds returns. The classic 60/40 mix also ignores other investment options - like real estate, commodities and gold - that can add extra diversification or even boost returns.

Does the 60/40 rule stand the test of time?

Many experts believe the traditional 60/40 rule may be less effective today. Bond interest rates are low, so your 40% in bonds may not keep up with inflation.

At the same time, shares and bonds have been moving up and down together (historically they perform differently in the same economic situation), so bonds aren’t offering as much protection when shares fall.

Rising interest rates can also push bond prices down just when you need them to be a safe haven. Because of this, the general expert consensus is that you might want to look beyond just shares and bonds - adding in other assets like property, commodities or higher-yield bonds - for better diversification.

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Final thoughts…

The 60/40 split is a simple way to balance growth with stability. But keep in mind that today’s low bond yields and the fact that bonds and shares have more recently moved in a similar direction, you might want to think about adding more diversification to the mix. 
As ever, you need to do what’s right for your personal circumstances, your timeline and how you feel about risk.

• Read: Why the 60/40 approach may not be diversified enough
• Read: Is my portfolio diversified enough?
• Read: What’s the right number of funds to hold?

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.